Protecting the Silver Pound – Funding your Grandchilds First Home

The Law Of... drawing from the silver bank

With 1 in 6 first-time buyers expecting to ask their grandparents for financial support when purchasing a home, the silver bank is now open for business. But with relationship breakdowns a common symptom of the modern age, what can family members do to protect their investments?

Mark Underhill, National Operational Accounts Manager for conveyancing, takes a look at the trend for familial loans and gifts funding house purchases, examining the finer points of these outlays.

Grandparents are Funding First-time Buyers

As part of its research into the housing market and first-time buyers, Simpson Millar discovered that the options available to those not yet on the housing ladder were fairly grim. Gone are the days of saving for a deposit, getting a mortgage and moving into your first home.

With house prices having risen disproportionately to wages, the only hope remaining for many is to ask their parents and grandparents for financial assistance.

46% expected to require financial help from either their parents or grandparents

Furthermore, as many as 14.5% were anticipating a gift from both their parents and grandparents, highlighting just how difficult it has become for young people to get their feet, unassisted, on the first rung of the housing ladder.

Echoing this trend, Barclays recently announced a no-deposit mortgage, which, as its name suggests, negates the need for a 5% deposit but requires a 10% contribution from a third party – parents or grandparents. This contribution is returned after 3 years – with interest – on condition that mortgage repayments have been maintained.

Parents and grandparents are bearing the cost of the housing bubble, being the major source of the gifts and loans – one or both is required in 43% of purchases – that help their children and grandchildren get a home of their own.

The Nuts and Bolts of Funding your Grandchild's First Home

If you are considering investing in your grandchild's future, then you should also be prepared to protect that investment. After all, in these modern times a 'forever home' isn't necessarily forever. Things to take into consideration include:

1. Uneven Deposits

An uneven deposit is where one party in the buying relationship contributes more towards the deposit than the other.

Of course, if the relationship does break down and the property you have provided financial assistance to buy gets sold, you are going to want to ensure that the corresponding percentage of the sale goes either to your grandchild or back to you.

This is why a written legal agreement is essential in these arrangements. That way, all the parties with a financial interest in the property can be sure they receive the share they are entitled to. Initially, seeking legal advice in these matters might seem a little mistrustful, particularly when it concerns grandchildren and their partners, but it is the only way to be sure your investment remains protected whatever happens down the line.

2. Lending Money for a House Purchase

One of the main concerns when lending your child or grandchild money for a house purchase is with regards to the tax implications.

As you are in ownership of the debt and expecting to get the money back, it will count as an asset. This means that any loan you make will add towards the overall value of your estate and be liable for inheritance tax (IHT).

3. Gifting Money for a House Purchase

It isn't simply a case of handing the money over to your grandchildren and pointing them in the direction of the bank. You will need to confirm in writing that it is a gift. This is necessary so that your grandchild's solicitor can confirm that you have no interests in the property and that you are not expecting the money to be paid back. Mortgage lenders need this to ensure that you are not going to change your mind at some point and say it was actually a loan. A standard proof of ID and funds check will also be required.

It is worth noting that your grandchild may have to pay back the gift if you die within 7 years of making it, as it will then count towards your estate and be eligible for inheritance tax.

This rule was established to prevent people attempting to evade IHT by making gifts. The same applies in the event you go bankrupt, where the money will go towards the value of your assets when it comes to paying back your creditors.

Be Legally Prepared for any Eventuality

The important thing in any of these types of financial arrangements is to ensure you are covered legally in the event of things turning bad.

Mark Underhill says:

"It may not be the sort of thing you wish to dwell on, but the unthinkable can happen and financial risks to your investment can arise not only from relationship breakdown, but also in the face of tragedy if a grandchild should die."

"In either case, the prospect of ensuing court battles due to what might be unreasonable claims upon property and any profits from a sale, is not one you would wish for. That is why getting professional and independent legal advice beforehand and, where necessary, drawing up some form of a contract is imperative."

"That way you know that you, your grandchild and your investment are all protected in the long run."

Protect your Investment Today

The first step to guaranteeing your investment in a property is to speak to an independent legal advisor. Simpson Millar has a department of Conveyancing Specialists, who can provide you with the all the advice you need to ensure you and your grandchildren don't lose out.

We are a full service firm, meaning we can also provide qualified advice on any concerns you may have about:

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